Eletrobras raises R$33.7bn in mega stock offering

After privatization by capital increase, government will hold about 40% of votes

06/10/2022

Investors say changes will help company gain efficiency — Foto: Domingos Peixoto/Agência O Globo

Investors say changes will help company gain efficiency — Foto: Domingos Peixoto/Agência O Globo

Eletrobras managed to price at R$42 each share in the mega stock offering that will privatize the company. Eletrobras sold 802.1 million shares, raising R$33.7 billion.

According to a Valor Data survey, in dollar terms, the amount represents a little more than twice the volume of Vale’s privatization, and 78% more than Banespa’s privatization. It was the second-largest privatization ever in the country, second only to that of telecoms company Telebras.

With the sale of part of shares held by the Brazilian Development Bank (BNDES) and especially the dilution of the federal government’s stake with the issuance of new shares, the government is no longer the controlling shareholder of Eletrobras — although it holds a golden share. The federal government and the BNDES go to 40.3% from 68.6% of the common shares (there is still a small participation of other government funds, not detailed in the prospectus), going to 36.9% of the total capital.

By early evening, the tug-of-war between banks and investors was concentrated on a R$0.5 difference, with the official range between R$42 and R$42.5. Relevant international investors, such as GIC and CPPIB, had tried to reduce the price (in the morning, the groups were pushing for shares between R$38.5 and R$39.5). With the high interest in the operation, around R$60 billion, the banks managed to raise the price. The Brazilian institutional group includes funds such as SPX and Truxt, already existing shareholders 3G Radar and Banco Clássico, and firms such as RWC and GQG.

Workers who invested using funds from the Workers’ Severance Fund (FGTS) will keep R$6 billion in shares, which was the maximum value for this type of reserve. According to Valor Investe, around 370,000 workers used the FGTS to make reserves for the shares — a demand higher than the 248,000 workers who joined, with the same fund, Petrobras’s offering in 2000, but lower than Vale’s offering, in 2002.

In the privatization process, the company wants to migrate to Novo Mercado — the strictest governance segment of B3. To keep the status of a corporation, the golden share gives the federal government veto power on changes in the bylaws, such as trying to change to 10% the limit of voting power for each shareholder or group. The company also defends the new composition, which prevents the controlling shareholder from creating a poison pill.

Privatization via capital increase also implies the payment of fixed concessions, concerning the renewal of concessions and the adoption of the operation regime — changing from the quota model to the independent production model, in which the plants can sell power at market price.

Although it is different from the classic privatization by auction, with the sale of government participation, the process has the same outcome. “Internally, the structure changes a lot. There is no longer need for a public hiring test, it is no longer under the control of the public spending watchdog TCU, it no longer fits into the law of state-owned companies, it is no longer a semi-public company,” said Vitor Rhein Schirato, founding partner of Daemon Investimentos.

These changes alone can already help the company gain efficiency, in the view of investors. “Historically, privatizations have been accompanied by higher productivity and competitiveness. The companies became more efficient and this in itself should boost competition in the sector, benefiting the consumer,” said Sergio Zanini, a partner at Galapagos.

With different projects and supporters in recent years, the privatization of Eletrobras was fraught with disbelief even after the public offering was filed (you never know when an injunction might come along). At the beginning of last year, Wilson Ferreira Jr. left the command of the company – to which he had agreed to return precisely to conduct the privatization – annoyed with actions in different wings of government to block the process.

Mr. Ferreira Jr., who currently heads Vibra, estimates that Eletrobras will be able to more than triple its investments, becoming a more efficient and competitive company. The management of a state-owned company “is a living hell,” the executive told newspaper O Estado de S. Paulo last week, describing complex and rigid decision-making. The company, on the other hand, will now assume risks that used to be shouldered by the controlling shareholder, such as hydrological risks.

Some people link Eletrobras’s privatization to the beginning of the electoral race – but the fact is that it materialized. “It was one of the government’s promises since the election and, for good or for bad, being able to deliver this offering, at this size, with this demand, is relevant for the government,” Mr. Zanini said.

In the base offer, Eletrobras issued 627.7 million new shares, and BNDES sold 69.8 million shares. An additional allotment added more 104.6 million to the offering.

*Maria Luíza Filgueiras, Manuela Tecchio — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Farmers seek to avoid barriers to Brazilian meat in Europe

Mato Grosso-based institute proposes technical, financial cooperation to foster sustainable production

06/09/2022

The Mato Grosso Meat Institute (Imac) has started a movement to try and avoid the approval of new rules by the European Union that would impose trade barriers to livestock products from the state and the country because of deforestation.

In meetings with authorities in Belgium and Germany this week, members of Imac will present a proposal for technical and financial cooperation with Europe to foster sustainable production in Brazil, to remunerate the environmental services rendered, and improve the monitoring of the herds.

“We will suggest that the European Union participate with more influence and economic capacity in the Brazilian meat market, defining obligations for monitoring and inspection of the production chain, with the integrated cooperation of its links, to give support and structure an action plan that will allow the recovery of deforested areas without marginalizing cattle farmers, mostly small and medium-sized ones,” said Caio Penido, head of Imac.

The intention is to open a “channel of dialogue” with the Europeans. Imac wants to put together a more “proactive, constructive and inclusive” joint trade policy, capable of sharing costs and problems. The current assessment is that new European rules under discussion may exclude several producers that act legally, without reaching the objectives of environmental protection.

Among the points presented by Imac to the Europeans is the fact that the proposed regulation for the bloc does not consider the implementation costs and the economic impact borne by farmers for its regularization, nor does it treat companies that already apply compliance systems differently.

The institute suggests the “creation of incentives through remuneration for environmental services rendered, including in an integrated manner to the global carbon market” and the increase of import quotas with premium prices for properties that conserve biodiversity.

The institute also warns that the legal deforestation supported by the Brazilian Forest Code, of up to 20% of forest areas in the Amazon rainforest, for example, must be respected. According to Imac, the cattle farmers will not give up a certain gain with the production in a regular and productive area because of “generalist economic arguments.”

In the document presented to the Europeans, Imac highlights the control programs already implemented in the country. “The main problem of deforestation in Brazil, in the meat chain, is technological unavailability and lack of professional assistance,” it said.

The European proposal for “regulation of deforestation-free products” determines that imports will not be able to enter the European market if the production area is identified as being in a deforestation zone, which Brazilian cattle farmers consider a “boycott.”

The project may be analyzed by the Council of Ministers at the end of the month, and the final draft is expected to reach the European Parliament in July. Besides meat, the rules may affect other production chains, such as soy and coffee.

*By Rafael Walendorff — Brasília

Source: Valor International

https://valorinternational.globo.com/
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Pressure on long-term interest rates may remain high

Analysts say fiscal risk, approaching end of the tightening cycle will stir interest rate curve

06/09/2022

Luiz Armando Sedrani — Foto: Divulgação

Luiz Armando Sedrani — Foto: Divulgação

Even though they are at the highest level this year, long-term interest rates may not find so much support ahead for a stronger withdrawal of risk premiums. The market is already starting to see the end of the monetary tightening cycle over the coming months and, even though some agents see this event as important to unburden the market, the scenario for long-term rates is not very favorable, because fiscal and political risks continue to rise, at the same time as the Treasuries continue to go up.

The bets of the agents, therefore, have been concentrated on the steepening of the yield curve, that is, on a wider spread between long-term and short-term interest rates. At the moment, the spread between long and short rates is negative — in market jargon, the yield curve is inverted. On Wednesday, the difference between five- and ten-year interest rates was -0.635 points. In the view of market analysts, this difference tends to widen after the end of the monetary tightening cycle. This bet indicates the possibility of short interest rates falling significantly, or even the chance of long rates rising further.

“All the paths lead to a greater slope of the yield curve,” said Mauricio Oreng, head of macroeconomic research at Santander. He listed the factors that point to this scenario: the monetary tightening process in advanced economies, which has generated doubts about the natural level of interest rates; the inflation peak; the nearby end of Brazil’s benchmark interest rates Selic hike cycle; and the fiscal risks, which remain on the radar.

As for the international scenario, Mr. Oreng notes that international interest rates usually have an influence, especially on long-term rates. “We have this tightening scenario that may be faster than in other cycles for several central banks in developed countries and there is doubt whether in the future, when the cycle is over, interest rates will be at higher levels,” he said.

“The doubt is what the natural level of global interest rates will be in the future. Did we have an increase after all those inflationary impacts in the post-Covid, worsening of production chains, geopolitical tensions? It is a question mark that can bring the view that the natural interest rate in Brazil may have risen additionally,” Mr. Oreng said. He notes that, with the increase in fiscal risk during the pandemic, Brazil’s neutral interest rate rose to around 4% in real terms, in Santander’s calculations, and adds that it may be that the neutral interest rate will rise even more, depending on the global neutral interest rate.

As for domestic factors, fiscal risk is one of the issues that have often put pressure on long-term interest rates. In the last few days, the discussions about the sales ICMS tax and other tax cuts proposed by the federal government to contain fuel prices generated a strong rise in long-term rates, which reached their highest levels since October 2021. On Wednesday, the DI rate for January 2027 rose to 12.605% from 12.57%.

Besides the fiscal issues, one main factor cited by market analysts for betting on the steepening of the yield curve is the proximity of the end of the monetary tightening cycle. As soon as the Central Bank indicates that it has ended the process of raising interest rates, the market will start to include in the price of assets when the inverse movement will happen, which can generate a predisposition of the market to bet on the fall of shorter-term interest rates.

The CIO of BV Asset, Luiz Armando Sedrani, highlights the fact that Brazil is one of the few countries, among the world’s main economies, whose interest rate is already above current inflation levels, which can be translated into an advanced stage of the monetary tightening cycle.

According to him, global inflation caused by commodities may start to lose traction from now on. Moreover, when inflationary pressures more linked to economic activity in Brazil begin to give way, the disinflation movement may be faster than expected by financial agents. “This way, we have a preference for bets that benefit from the steepness of the yield curve. On the one hand, we believe that the Central Bank may cut rates sooner than expected. And, on the other hand, the increase in political risk also benefits the strategy,” states Mr. Sedrani.

In the context of better-than-expected fiscal results, the executive believes that it seems to be difficult to contain the government’s impetus to expand spending, especially in an election year. “We believe there will be pressure for more spending and the government will try to stimulate the economy. This concerns us, it has an impact on the yield curve, and so our bets are on steepening,” he argues.

Legacy Capital is another asset management company likely to increase positions that benefit from a greater spread between long and short interest rates, in view of the proximity of the end of Selic peak. “Whenever the cycle of interest rate hikes has been interrupted, the curve has steepened. For different reasons, but the slope always increases,” said Gustavo Pessoa, partner and manager of Legacy.

Legacy follows this process in Brazil and other countries, and it “has never failed,” Mr. Pessoa said. Thus, the firm maintains this position in the portfolio. “The difficulty is to understand when the cycle will be over. When the movement [of increasing the slope of the yield curve] happens, it tends to be abrupt and powerful,” he said.

Fernando Fenolio, the chief economist at WHG, evaluates that the bets on a wider spread between long and short interest rates are based on the view that the actions of the Central Bank are likely to influence short rates, while the fiscal risk can keep the long-term interest rate under pressure.

“If the Central Bank stops raising interest rates at the next meeting, in a scenario of high inflation and deteriorating expectations, the yield curve could steepen considerably with an inflation premium. It would mean a market reading that it [the monetary authority] would be interrupting the cycle at a moment when the work is not yet finished,” Mr. Fenolio said.

On the other hand, if the monetary authority ends the tightening cycle at a moment of cooling of current inflation and expectations, the inclination of the curve could occur at a lower magnitude. “In this case, the market would begin to project the interest rate cut cycle,” the economist said.

“But the premium for the fiscal situation could well dominate the steepening. In a more extreme scenario, if the fiscal risk rises too much, we could even see a need for the Central Bank to raise interest rates again and the curve to flatten again,” Mr. Fenolio said. He, however, stressed that this is not WHG’s baseline scenario.

By Victor Rezende, Gabriel Roca — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Eletrobras sees strong demand from investors

Demand could reach R$53.5bn; stock price of Brazil’s main power utility will be defined Thursday in privatization process

By Maria Luíza Filgueiras, Talita Moreira — São Paulo

06/09/2022

Eletrobras’s power transmission towers — Foto: Custódio Coimbra/Agência O Globo

Eletrobras’s power transmission towers — Foto: Custódio Coimbra/Agência O Globo

Brazil’s main power utility Eletrobras prices Thursday its great stock offering and, on the way to privatization, reaches the final stretch of the bookbuilding with plenty of volume to launch the operation. According to sources close to the operation, the company had already secured about R$53.5 billion by early Wednesday afternoon.

The demand via the Workers’ Severance Fund (FGTS) is around R$7.5 billion, but allocations will be limited to R$6 billion – which already signals sharing among investors. Workers could invest up to 50% of their resources in the fund, and applications closed on Wednesday at noon.

As it has already been launched with strong anchoring, the institutional investors that are not in these groups or that exceed the ceiling reserved for each profile will dispute what remains of the bookbuilding. There are about R$26 billion in reserves for a number of shares of around R$6.5 billion – that is, the demand is four times higher than the offer.

When the secondary offering was launched, Eletrobras shares were at R$44. On Wednesday, ELET3 closed at R$42.14 and ELET6 at R$41.63, which adjusts market expectations for a funding of around R$34 billion, with the allocation of the supplementary lot.

The banks BTG Pactual, Bank of America, Goldman Sachs, Itaú BBA, XP Investimentos, Bradesco BBI, Caixa Econômica Federal, Citi, Credit Suisse, J.P. Morgan, Morgan Stanley and Safra are coordinating the operation.

Source: Valor International

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Fuel tax breaks offer short-term gain but slow down growth in 2023

Economists say positive impact is temporary and that inflation will follow

*Alex Ribeiro — São Paulo

06/09/2022

Affonso Celso Pastore — Foto: Leo Pinheiro/Valor

Affonso Celso Pastore — Foto: Leo Pinheiro/Valor

The government’s measures to reduce fuel prices may lower inflation and stimulate the economy in the short term, during the election period, but they will lose a good part of these gains next year, making the scenario of the new presidential term more challenging.

“The best definition for this set of measures is fiscal populism,” said former Central Bank President Affonso Celso Pastore. “First, it brings down inflation in the election year, with the goal of boosting the approval rating of the president. It transfers inflation to next year since the measures cannot be extended if they have a minimum of responsibility. This is not economic policy. There are no economic or social objectives.”

The time-honored definition among economists for populism is precisely policies that bring gains in the short term, helping the approval ratings of the rulers, but that does not prove sustainable in the medium and long term.

Financial market economists are calculating the effect that the package of measures may have. Considering that the measures achieve all the goals expected by the government, inflation this year could be about 3 percentage points lower than forecast, according to calculations by Itaú Unibanco, which is in line with the estimates of other lenders.

The problem is that at least part of the measures is temporary. The Bolsonaro administration announced its intention to reimburse the states that cut the sales tax ICMS on diesel and cooking gas to 0% from 17%. It also intends to reduce to zero the federal tax rate by the end of the year.

This measure, according to Itaú, would have a downward impact of about 0.9 percentage points on inflation in 2022. But, as they are only valid for this year, they would also cause a 0.9 percentage point increase in inflation in 2023, which today is the main target of monetary policy.

Considering both effects, inflation this year would fall to 6% from around 9% estimated by the market, easing the pressure over President Bolsonaro during the election campaign. However, inflation could rise to 5.4% next year from 4.39% forecast by the market. Thus, it will be moving away from the inflation target of 3.25%.

A former head of the Central Bank, who asked not to be named, says that the inflationary impact in 2023 and beyond could be even more severe. States and municipalities are giving up non-permanent revenue gains and would have to replenish revenues with tax increases once the boom in commodity prices has passed.

The increased fiscal risk caused by the measure could also cloud the inflationary scenario, said Solange Srour, the chief economist at Credit Suisse. “The fiscal risk is increasing and creates a new problem for the new administration, whoever the president will be,” she said.

According to her, the states’ tax cuts, based on a revenue gain that does not tend to be permanent, could weaken their fiscal situation further down the road. “When states are in difficulties, the federal government is always called upon to bail them out.”

Short-term measures, on the other hand, give only short-term relief on some prices, but in essence do not change the dynamics of inflation. “The Central Bank should not feel more comfortable to end the cycle of interest rate hikes,” she said.

Itaú estimates that the entire tax reduction package would have a fiscal impact of 1.7% of the GDP, also considering the bill that limits the ICMS tax rate on electricity, telecommunications and fuels to 17%.

From the point of view of economic activity, the package would have an initial stimulus impact. Tax cuts expand the population’s disposable income and tend to make room for more spending in household budgets.

But, in a further moment, the economy will tend to feel the impacts of the worsening in financial conditions. As a result, the prospects for GDP expansion in 2022 may improve in relation to the 1.2% forecast by the market in Focus, the Central Bank’s weekly survey with economists. But for next year, it may fall below the estimate of 0.76%.

For now, Ms. Srour said, the market’s reaction has been relatively moderate, in interest rates, exchange rates and stock markets. But there may be an intensification of risks as the proposal of constitutional amendment (PEC) is discussed in Congress and it becomes clearer that the first year of the next federal and state governments will be more difficult.

“In the debates about the PEC, the pressure to offer a larger and longer compensation to the states, besides other demands, may increase,” she said.

Igor Barenboim, partner and director at Reach Capital, has a different view. For him, one cannot rule out the possibility of the measures having a more lasting positive effect. “It can be good for inflation, it can be good for economic activity,” he said.

He argues that Brazil is being impacted by a commodity price shock, with both positive and negative unfolding. On the negative side is inflation, particularly severe in fuel prices. But there is also a positive impact on the economy that favors tax collection.

For Mr. Berenboim, it is acceptable that political forces use some of those gains to mitigate the negative impacts of the shock. Another economist with a large bank says that even with the program launched by the government, the primary result will be much better than expected.

A few months ago, this economist’s estimate was for a primary deficit of R$100 billion. With the surprise in the tax collection and the auction of power utility Eletrobras, the outlook has changed to a positive result of R$80 billion. The new expenditure with the fuel package may lead to balance or a primary deficit, but not as high as previously predicted.

Mr. Barenboim says that the impacts of an eventual worsening of fiscal risks on inflation and activity are not guaranteed. At this first moment, the markets’ reaction was moderate, and the real economy would have already readjusted prices considering a weakened real.

Source: Valor International

https://valorinternational.globo.com/
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Analysis: Should Central Bank reassess fiscal risks?

Questions emerged after federal government’s decision to undermine fiscal anchor to hold fuel prices down

06/08/2022

Central Bank’s building in Brasília — Foto: Divulgação/Rodrigo Oliveira/Caixa Econômica Federal

Central Bank’s building in Brasília — Foto: Divulgação/Rodrigo Oliveira/Caixa Econômica Federal

Market analysts have begun to discuss whether the Central Bank’s Monetary Policy Committee (Copom) should reassess its balance of risks to inflation after the government unveiled the intention to go over the spending cap to reduce fuel prices in this election year.

In its last two meetings, the Copom became less downbeat about the fiscal situation. As a result, the danger that the lack of control of public accounts could lead to higher inflation than projected for next year took a back seat in its monetary policy decisions.

In March, the policymakers concluded that the balance of risks to inflation was less tilted to the negative side, arguing that current fiscal data were better than expected and that the foreign exchange rate and inflation expectations already reflect most risks. In May, for similar reasons, they saw risks balanced.

The rebalancing of risks was at odds with the view of most of the market. The pre-Copom survey made on the eve of the meeting in March showed that 50% of economic analysts evaluated that the fiscal situation had worsened at that moment, compared with 22% who said it had improved. The remaining 28% thought there had been no change.

Due to the strike by Central Bank employees, the results of the May pre-Copom survey were not released. The Central Bank has sent a new survey to the market to gauge opinions for its meeting next week.

In its official documents, the Central Bank has asked the financial market for “serenity” in assessing fiscal risks in an environment it considers to be one of great uncertainty. Many, however, say that the improvement in short-term data is undermined by the destruction of the fiscal anchor.

The exchange rate is again under pressure as the deterioration of the fiscal situation became clear after a new attempt by the federal government to go over the spending cap, the rule that limits public spending to the previous year’s inflation. Above all, such deterioration caused long-term interest rates to rise, which means that investors require a higher premium to buy National Treasury bonds.

A potential revision of the balance of risks would have implications for monetary policy. Currently, the Copom is managing interest rates with a view to meeting the 2023 inflation target. According to the most recent projection of the monetary authority, released in the May meeting, inflation is seen at 3.4% in 2023, above the 3.25% target for the year.

The market, however, already estimates inflation of 4.39% in 2023, after faster rates in April and May. The projections by the Central Bank may be revised upward as well.

If the Central Bank acknowledges the worsening of the balance of risks, making it asymmetric again, it would mean that the inflation expected by the policymakers would be even higher, since the chances of a higher-than-expected reading would be greater than of a lower-than-expected rate.

In theory, this would require even higher interest rates to bring inflation to the target within the relevant monetary policy horizon.

But many analysts are skeptical that the Central Bank will revise its balance of risks to inflation. The monetary authority has sent several messages that it is near the end of the monetary tightening cycle. In addition, considering that current inflation is rising more than expected, the Central Bank is unlikely to look for new reasons to raise interest rates even more.

* Alex Ribeiro — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Reduction in fuel taxes may harm ethanol

Cheaper gasoline can make biofuel unviable because of loss of competitiveness

06/08/2022

Analysts say measure may lead owners of bi-fuel cars to fill tank with gasoline instead of ethanol — Foto: Hermes de Paula/Agência O Globo

Analysts say measure may lead owners of bi-fuel cars to fill tank with gasoline instead of ethanol — Foto: Hermes de Paula/Agência O Globo

Eager to reduce fuel prices by any means, the Bolsonaro administration may end up hurting sales of a renewable fuel like hydrous ethanol, which has an average carbon footprint 70% smaller than the gasoline currently sold in Brazil’s gas stations.

Analysts say the creation of a 17% ceiling on sales tax ICMS levied on fuels in a general way, as proposed in the complementary bill 18, both for fossil and renewable fuel, may lead owners of bi-fuel cars to fill their tanks with gasoline instead of ethanol.

This may happen because the ICMS tax on ethanol is already lower than the rate charged on gasoline in several states, which guarantees the biofuel competitiveness for a good part of the year in important consumption centers, such as São Paulo, Minas Gerais, Paraná and Goiás.

Together, the four states represent 80% of the Brazilian consumption of hydrous ethanol. In these states, the ICMS on gasoline is between 25% and 31%, while the tax on ethanol is 5 to 12 percentage points lower, between 13% and 25%.

If ICMS is limited to 17% across the board, the reduction in the gasoline tax burden will be much greater than the reduction in the ethanol tax burden.

In São Paulo, only gasoline would be favored, since the load on fossil fuels is currently 25%, while the ICMS tax rate on ethanol is 13.3%. According to simulations by ItaúBBA, gasoline would become cheaper, and ethanol would be worth 74.6% of its price, up from 69.4% today. For the average Brazilian bi-fuel fleet, hydrous ethanol becomes uncompetitive when its price exceeds 70% of the price of gasoline, because of efficiency.

The same is true for Minas Gerais, the second-largest biofuel consumption center in the country, where gasoline is taxed at 31% of ICMS and ethanol at 16%. With the reduction of the gasoline tax rate to 17%, the ratio between the price of biofuel and gasoline would rise from the current level of 70.1% — where the two fuels are equivalent in terms of efficiency — to 80.1%, making ethanol less competitive.

The discussion has reached the Senate. On Tuesday, Senator Fernando Bezerra Coelho (Brazilian Democratic Movement, MDB, of Pernambuco) said he is likely to present a constitutional amendment proposal of ethanol this Wednesday to ensure a 30% lower ICMS tax rate for biofuel compared to gasoline.

The PIS/Cofins tax exemption that the Bolsonaro administration intends to grant both on gasoline and ethanol would not change this scenario, since both fuels would be treated equally. According to BTG Pactual, gasoline would be 17% cheaper at the pumps in São Paulo, or R$1.14 a liter.

If ethanol producers want to prevent the destruction of demand for the product, they will have to accept receiving lower prices, analysts say. BTG Pactual calculates that the prices charged by São Paulo’s mills to distributors would have to drop 17%, or R$0.38 a liter, to R$2.87 a liter.

In the scenarios outlined by ItaúBBA, the São Paulo plants that supply the state would have to reduce the amount they receive by R$0.2806 per liter, while those in Minas Gerais would have to accept a reduction of R$0.6556 per liter.

Felipe Maia, a tax lawyer with Santos Neto Advogados, says that if there is no different treatment in the debate about tax reduction on consumption, “there will be a migration and there will be a lack of demand for ethanol, which will have an environmental impact.” In many states, biofuels already have tax incentives at the production stage, but Mr. Maia says this is not enough to encourage this market.

This dynamic would also impact the sugar market, since the reduction in the price of hydrous ethanol tends to discourage mills from producing more biofuel and stimulate the production of the sweetener – even if the additional remuneration from the Decarbonization Credits (CBios), linked to ethanol, is taken into account, BTG Pactual said.

Currently, the total remuneration offered by ethanol, already considering the gains with CBios, is 3% below the remuneration offered by sugar. With a drop in ethanol gains, the difference would reach 13%, according to the bank. As a result, the mills can produce more sugar than expected.

In a scenario with prices from last week, consultancy hEDGEpoint had already signaled a tendency of pressure on sugar prices if the ICMS bill is approved. According to the firm, the price of ethanol, converted to the value of sugar on the international market, which was the equivalent of 20.14 cents a pound last week, would fall to 18.46 cents a pound.

* Camila Souza Ramos — São Paulo

Source: Valor International

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CBMM plans new niobium oxide plant

According to company’s plan for 2030, use of products in electric batteries for cars and other vehicles will represent 35% of revenue

06/08/2022

Ricardo Lima, Eduardo Ribeiro — Foto: Carol Carquejeiro/Valor

Ricardo Lima, Eduardo Ribeiro — Foto: Carol Carquejeiro/Valor

CBMM’s main business today continues to be the use of niobium in the steel industry. But in eight years, in its plan for 2030, the use in electric batteries for cars and other vehicles will represent 35% of the revenue of the Brazilian company, which is a world leader in the market of niobium products and its alloys.

An important step, within the strategy of the company controlled by the Moreira Salles family, one of the owners of Itaú Unibanco, is expected to be taken by the end of this year, said Eduardo Ayrosa Ribeiro, CEO of CBMM until the end of this month, when Ricardo Mendonça Lima, currently vice president, takes office.

Mr. Ribeiro told Valor that the company’s board of directors, chaired by Pedro Moreira Salles, will evaluate the proposal to build a niobium oxide plant capable of producing 20,000 tonnes per year. The plant is initially estimated at R$1.2 billion, Mr. Lima said.

It is from the ferroniobium alloy, Mr. Ribeiro explains, that products are produced for use in various noble applications, such as electric batteries.

So far, 90% of sales of niobium products leaving the company’s mine and metallurgy facilities in Araxá, Minas Gerais, go to the steel industry as ferroniobium. The remaining 10% are alloys and special oxides with various applications, such as in semiconductors.

Currently, CBMM has an oxides unit for 10,000 tonnes per year. And it has already made some sales of oxides for batteries, the executive said. There were 50 tonnes in 2021, and the company expects to sell 1,000 tonnes this year – destined for automobiles, commercial vehicles, motorcycles and electronic equipment. The company is already developing the product even for robots in logistics centers.

The focus is many years, or decades, ahead. The main niobium consumption trends, says Mr. Ribeiro, will be in the mobility industry, electrification, urbanization, digital transformation and sustainability, “where the material can add value. Our focus is on niobium products, using the company’s long-term reserves.” The niobium reserves in Araxá, at the current rate of production, are sufficient for more than 100 years.

“In the new scenario, we could have two to three more oxide plants of 20,000 tonnes each,” the CEO said. This is what is designed to meet the future demands for niobium in the new global consumption grid.

The production of electric batteries is advancing at a fast pace, with lithium as the base mineral for all of them. Other elements make up the parts of the batteries (cathode, anode, electrolyte and separator). These are niobium, nickel, cobalt, manganese, iron and carbon-based materials, such as natural and synthetic graphite, and hence graphene.

CBMM’s most advanced project is a partnership with Toshiba to manufacture electric batteries with a niobium anode. It is already in an advanced stage of testing with automotive customers in Japan. In Brazil, it will start with electric buses made by VW Caminhões, Mr. Ribeiro says. “In this partnership, we are in talks with customers, and production on a commercial scale will be accelerated from 2025 onwards,” he said.

In addition to Toshiba, CBMM is working on the development of applications for niobium alloy and oxides with universities, research centers and several other partners worldwide. “Many important companies are in this race,” the executive said.

At the same time, the company is shaping its production base in Araxá – today it has a production capacity of 150,000 tonnes of ferroniobium per year. It is enough to the level of 100,000 tonnes foreseen for this year – 90,000 tonnes of ferroniobium and 10,000 tonnes of other products.

The 2030 plan, however, considers one more expansion cycle, to be defined at 50,000 or 70,000 tonnes. If the market goes according to the projections, it will be around 210,000 tonnes of capacity, 35% of which, or 70,000 tonnes, will be for transformation into oxides. For steel tempering, there would be around 130,000 tonnes. “No growth is expected in the volume of steel produced, but there is room for greater use of niobium with an increase in steel for high-end applications with the decarbonization wave,” he said.

The new units, two or three of oxides, and one of ferroniobium are greenfield facilities, on their own sites, says Mr. Ribeiro. The company has space available in its 8,000-hectare area.

The new ferroniobium metallurgy will only be needed around 2028, with construction starting between 2025 and 2026. All in all, says the CEO, it is an investment package of R$9 billion until the end of the decade in the region – a prominent project is a new structure (dam) for the deposition of tailings called “n 9,” which will cost about R$2 billion.

“It’s been five years of studies, including studies in France and the U.S., to see with specialists the best technology for this structure,” says Mr. Ribeiro. The company is investing such a high amount of funds to have maximum security, the executive said, as the structure will be key in the company’s growth project.

*Ivo Ribeiro — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Companies gauge interest in stock offering again

Eletrobras’s capital increase encourages capital market

08/06/2022

Companies are slowly beginning to evaluate the possibility of resorting to the capital markets to finance their expansion. In the last two weeks, sanitation companies Corsan (Rio Grande do Sul) and BRK Ambiental (São Paulo) announced that they intend to go public after some months marked by a few IPOs.

Stimulated by the secondary offering of power giant Eletrobras, oil companies listed on the Brazilian stock exchange have also started to sound out investment banks to take the same path. PetroRecôncavo informed the market that it intends to raise up to R$2 billion. Sources told Valor that 3R Petroleum and PetroRio are considering doing the same, as well as power generation company Eneva.

If expectations are confirmed, sanitation companies BRK Ambiental and Corsan could launch the first IPOs of the year. China Tree Gorges (CTG) and oil company SeaCrest are also starting to sound out investors and may make initial stock offerings after the elections, sources say.

So far, there have been nine secondary offerings this year, raising R$13 billion. With the scenario of high interest rates and inflation both abroad and in the domestic market — compounded by uncertainties brought by the presidential elections in October — companies had given up on the capital markets. With Eletrobras’s capital increase, which could raise about R$30 billion, companies have begun to check and see if there is room for a restart. Eletrobras’s offering is expected to be priced Thursday.

But the atmosphere is not for euphoria. Gustavo Miranda, head of investment bank at Santander, sees the scenario as more favorable for secondary offerings than for IPOs. “Brazil, compared to other emerging countries, is even more attractive because of commodities.” He observes, however, that this factor is not enough for initial stock offerings to resume the pace of the last two years. Turbulence in the economy and strong market volatility continue to drive companies away from the market.

This is happening abroad as well. In the United States, the volume of stock offerings plummeted, Mr. Miranda said. From January to May, 157 companies debuted, raising $17.9 billion. In the same period last year, 628 companies went public, raising $192 billion, according to Dealogic.

According to him, the next windows for offerings are narrow. There is room for pricing until July. Then, with the summer holidays in the Northern Hemisphere, the opportunities for those seeking to go public after the elections will be between the end of November and December.

Last year, there were 76 IPOs and secondary offerings, which raised almost R$130 billion, compared to 51 in 2020, with R$117 billion raised. For 2022, preliminary estimates by investment banks show that the amount could reach a third of that negotiated in the past if Eletrobras manages to conclude its secondary offering.

In the financial market, there is still a lot of skepticism about the IPO plans of BRK and Corsan. According to a source, the two sanitation companies do not have a price reference for shares of competitors in the domestic market. Corsan’s offering would be the first privatization of a state-owned company in the sector. BRK would be the first private-sector company in the segment to go public — Iguá Saneamento has already tried, but did not reach an agreement on the price of the shares.

The situation is different for CTG and oil company SeaCrest, which have rivals in the exchange. Even so, if the political and economic turbulence persists, the offerings may be postponed until 2023.

A source familiar with Corsan says that the biggest difficulty will not be the market, but the setting up of the operation. One major obstacle is public spending watchdog TCE, a state agency, whose questionings were determinant for the postponement of the offering, in January. Since then, the company has been making adjustments to meet the agency’s demands. For example, in May, it disclosed new rules of governance applicable after the offering.

There is still no approval by the TCE, but an agreement is expected for the end of next week. Unlike the Federal Court of Accounts (TCU), which can bar privatizations, the state court would not have this power, but an unfavorable position would bring great risk to the offering.

Besides the TCE, there are dozens of requests for canceling the process, but, according to the source, about 80% of the requests have already failed, which shows that the process has been robust, he said.

In January, before opting for postponing, Corsan almost closed an anchor agreement with Aegea and Perfin for its IPO. Today, the perception is that “there should be no formal anchoring” for the offering, according to the source.

BRK’s offering, announced last week, was not so well seen at Corsan: on the one hand, it strengthens the idea that the basic sanitation industry stands out; on the other, the IPOs are seen as competing for the same investors.

According to a person familiar with the matter, BRK has already started sounding out investors to test the pricing of its shares. There is a consensus that state-owned bank Caixa, one of the company’s shareholders, wants to reduce its position. Brookfield, another shareholder, is not in such a hurry, sources say. The prospectus draft sent to the Securities and Exchange Commission of Brazil (CVM) foresees a primary offering, aiming to raise funds for auctions.

Bernardo Parnes — Foto: Ana Paula Paiva/Valor

Bernardo Parnes — Foto: Ana Paula Paiva/Valor

For Bernardo Parnes, founding partner of the financial advisory firm Investment One Partners, the privatization of Eletrobras is positive for the capital market. “Just look at the examples of Vale and the Telebras system. In the case of Eletrobras, the offering will help unlock value in the company.”

Mr. Parnes does not see, however, a capital market recovery in the short term. “About 80% of the companies that carried out an IPO between 2020 and 2021 have undervalued shares now.”

According to him, several factors contribute to this diagnosis, such as high interest rates in Brazil and abroad, the Russia-Ukraine war, which affects logistics, and rising oil prices. Mr. Parnes sees a recovery of the global economy between the end of 2023 and the first half of 2024.

PetroRio said that the secondary offering is one possibility for funding, should it decide to go ahead with the operation. Eneva said it is considering some alternatives to finance recent acquisitions of the company, “always striving for the best allocation of funds and strong capital discipline. One possibility analyzed is a secondary offering, which is still under study.”

CTG and 3R Petroleum said they would not comment on market rumors. Caixa declined to comment, citing a quiet period. BRK, Brookfield, Corsan, Aegea and Perfin declined to comment. SeaCrest did not immediately reply to a request for comment.

*By Mônica Scaramuzzo, Taís Hirata — São Paulo

Fonte: Valor International

https://valorinternational.globo.com/
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OECD to analyze Brazil’s practices, policies

Deforestation, trust in institutions among issues to be examined before admission

06/07/2022

OECD’s building in Paris — Foto: Hervé Cortinat/OECD

OECD’s building in Paris — Foto: Hervé Cortinat/OECD

The Organization for Economic Cooperation and Development (OECD) will examine from now Brazilian practices and policies in negotiations to evaluate the country’s admission to the organization. The assessment will range from trust in institutions to deforestation.

Valor found that the roadmap with the terms, conditions and process for Brazil’s ingress, has already received the green light from the OECD Council of Representatives, and will now be formally approved by the ministers of the 38 member countries on Thursday in Paris.

The way in is identical for the five membership candidates — Peru, Bulgaria, Croatia and Romania besides Brazil. Argentina had its invitation frozen as Alberto Fernández’s government did not commit to the organization’s values under the conditions the current members demand.

The list of core principles for technical evaluation in the different OECD committees is long and includes new recommendations approved recently by the entity.

A new subject for which Brazil and the other four candidates will be evaluated, in the field of governance, is people’s trust in their institutions. For the OECD, trust is the basis of the legitimacy of public institutions and of a functioning democratic system, and is crucial to maintaining political participation and social cohesion.

Trust is important for the success of a wide range of public policies that depend on behavioral responses from the public, such as respect for regulations and the tax system. In the long run, trust is considered necessary to address social challenges such as climate change, an aging population, and the automation of labor.

In the field of governance, the evaluation will also focus on issues such as the structure of governments, including separation of powers, and the integrity of the public sector, including the application of principles of high standards of behavior in public institutions.

Unsurprisingly, the environmental issue takes up more space on the roadmap for Brazil and the other candidates. Its policies and practices will be compared to OECD best practices. In fact, the environmental policy and chemicals committees have 40% of the OECD recommendations. The candidates will be examined based on at least 20 items on the environmental front, proportionally the largest number.

In the case of Brazil, the issue takes on a greater dimension because of the distrust with which the Bolsonaro administration is viewed on the environmental front. The map mentions the issue of deforestation in relation to the environment and agricultural production, according to a source.

The OECD wants to know what happens in the candidate country in line with the commitment made in Glasgow last year to “working collectively to halt and reverse forest loss and land degradation by 2030.”

The Environmental Policy Committee will also check how Brazil applies the principle that the polluter, rather than government subsidy, pays for prevention and control measures against pollution. It will also assess whether sectoral policies take into account the need to internalize environmental improvement. In the Agriculture Committee, one question is whether sectoral policies contribute to sustainability and improved environmental performance, and “green growth.”

In the discussion about the roadmap for Brazil, France was particularly active on environmental and agricultural issues, but without blocking the negotiation.

In the Fiscal Affairs Committee, the elimination of double taxation on income and capital will be examined, adopting the OECD convention model. On the financial front, the blockchain issue will also enter the evaluation, for example.

Economy Minister Paulo Guedes and Chief of Staff Ciro Nogueira will be at the OECD on Thursday for the approval of the roadmap.

From the 20th to the 24th of this month, a mission from the OECD, called the kick-off mission, will take part in the OECD/Brazil Forum with representatives from the Brazilian government, for the negotiations for the country to fit into the OECD standards.

Mathias Cormann, Secretary-General of the OECD, will be received by President Jair Bolsonaro on the 22nd in Brasília, symbolically launching the country’s admission process to the organization.

Source: Valor International

https://valorinternational.globo.com/
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